19 May 2017, by Cynthia Gabriel, Centre to Combat Corruption and Cronyism (C4).
The tale of 1 Malaysia Development Berhad (1MDB) is one of brazen outright theft and corruption – perhaps the largest in the world. Between 2009 and 2015 US$3.5 billion was lost from Malaysia’s self-styled development company allegedly through theft, bond mispricing and overpayment for assets.
1MDB was set up as a sovereign wealth fund, owned by the Malaysian government, with the Malaysian Prime Minister as the chair of its advisory board. Its aim was to “drive strategic initiatives for long-term economic development for the benefit of a broad spectrum of Malaysians”.
However, 1MDB underlines in bright red the alleged complicity of the global financial system in transferring ill-gotten gains by corrupt regimes from the developing world.
1MDB in brief
In July 2016, the US Department of Justice (DoJ) seized over US$1 billion in assets allegedly obtained using money stolen from 1MDB. In its civil filings, the DoJ outlined three main phases of criminal conduct:
- The Good Star Phase: between 2009 and 2011 under the pretence of investing in a joint venture with PetroSaudi International, over US$1 billion was transferred to a Swiss Bank account held by Good Star Ltd.
- The Aabar-BVI Phase: in 2012 approximately US$1.367 billion, as part of two separate bond offerings guaranteed by 1 MDB and the International Petroleum Investment Company (IPIC), was transferred to a Swiss bank account belonging to Aabar Investments PJS Limited (Aabar-BVI). It was named to give the impression that it was associated with Aabar Investments PJS (Aabar), a subsidiary of the IPIC, a company with which 1 MDB did legitimate business.
- The Tanore Phase: in 2013 US$1.26 billion was diverted from a third bond offering. A significant portion of the proceeds ended up in a bank account in Singapore held by Tanore Finance Corporation.
The DoJ filings found that the proceeds of these crimes were “laundered through a complex series of transactions, including through bank accounts in Singapore, Switzerland, Luxembourg, and the US”.
According to the DoJ, these funds were used for the personal benefit of individuals, rather than for the benefit of 1 MDB and by extension the Malaysian people. They were used to purchase assets – particularly in the US – amounting to millions in property and art, and investments in film and music.
What went wrong?
The misappropriation of funds from 1MDB reveals serious weaknesses in Malaysia’s state and corporate governance.
Shell companies were used as conduits for the transfer of money assisted by jurisdictions that do not insist on transparency of companies’ beneficial owners, and international banks, lawyers and other facilitators that either failed in their due diligence or were complicit in the transfer of stolen funds.
This case illustrates the abject failure of international money-laundering controls despite the heavy fines that have been meted out over the years and the work of the Financial Action Task Force (FATF).
What’s to be done?
We need more international cooperation to stop money laundering in its tracks – with due diligence requirements for the facilitators of crime and an effective cross-border mechanism to nab the global kleptocracy.
While 1MDB provides ample evidence of the global failure to tackle grand corruption, the UNCAC’s second review cycle is an opportunity to take a critical account of asset recovery mechanisms across the globe (chapter V).
Malaysia is under review by the UNCAC review mechanisms in the first year of the second cycle of reviews (2016-2017), which should provide a great opportunity to track any progress.
About the author
Cynthia Gabriel is the Founding Director of C4, human rights advocate, anti-corruption activist, former Executive Director of SUAREM and former MBPJ City Councillor.